More in Investing in Funds & ETFs

“We identified robotics and artificial intelligence as an exciting global investment theme,” says
Daniel Prince,
head of iShares product consulting at BlackRock. “There have been many milestones and breakthroughs in robotics, AI and the intersection of the two.”

The entry of firms like BlackRock is to be expected in a surging “thematic” area like AI and robotics, says
Dave Nadig,
managing director of news and analysis site ETF.com. New entrants, he says, are also being attracted by the success of established funds like
Robo Global Robotics & Automation Index
ETF (ROBO), which has assets of $1.57 billion, and
Global X Robotics & Artificial Intelligence
ETF (BOTZ), which stands at $1.72 billion.

“That’s a big enough pool that the bigger players are inevitably going to want to jump in,” he says.

Robo Global CEO
Travis Briggs
says specialized ETFs like ROBO offer direct exposure to the surging field that is hard to find in broader, tech-focused ETFs, despite the growth of AI and robotics across the tech sector as a whole. For example, ROBO includes access to small and medium-size companies that produce not just robotic arms used for surgery but the companies that make the components that go into those arms.

Recent decline

But recent times have been tough for the funds. BOTZ has seen returns of minus 16.8% year to date, and ROBO is down by 12.1%. BlackRock’s $8.7 million IRBO is down 9.5% since its inception in June.

Mr. Briggs acknowledges that it “seems contradictory that such evolving technologies could be lagging.” He attributes it partly to a hangover effect following a particularly buoyant 2017, when ROBO returned about 44%. Additionally, he points to declining demand in China, thanks to a tightening monetary policy and trade tensions with the U.S.

Intelligence Quotes

Comparing three AI-focused ETFs, year to date. (iShares Robotics started trading in June.)

$50

Robo Global Robotics &

Automation Index ETF

ROBO

40

iShares Robotics &

Artificial Intelligence ETF

IRBO

30

20

Global X Robotics &

Artificial Intelligence ETF

BOTZ

10

M

O

A

M

J

J

F

A

S

J

N

Source: FactSet

Jay Jacobs,
head of research and strategy at Global X, says investor expectations for the area became extremely high in 2017, but earnings of a number of companies missed those expectations earlier this year. However, he is bullish, arguing that “long-term growth expectations are completely unchanged.”

BlackRock’s Mr. Prince notes that in the short term, growth stocks “may be susceptible to volatility, but we launched IRBO to capture the long-term theme of a structural shift in the economy leveraging robotics and AI innovation.”

A narrow theme

The recent poor performance is partly due to choppy markets more broadly in October, says Mr. Nadig. Many of the companies in the funds, he says, are small or midsize high-growth or momentum names, which “tend to be the first ones on the sell sheet when we get a roll-off in the market.” Mr. Nadig says investors need to be cautious when investing in a niche area.

“Anytime you invest in a narrow theme like this, you are in fact a speculator, whether you think of yourself as one or not.”

Mr. Cowan is a writer in Northern Ireland. He can be reached at reports@wsj.com.